Here in the depths of the bust, it is tempting to feel nostalgia for the boom. Let’s not. The bust has been brutal but the boom wasn’t so great either. The British economy actually grew more in 1979, the year of the “winter of discontent,” than it did in 2006 at the height of the bubble. Most of the western economies did better in the late, unlamented 1970s than they ever have since.
For the past 30 years, the world’s engine of growth has been debt-fuelled consumption financed by asset price bubbles. Growth has been sketchy, financial crises common, inequality rampant. Last week I wrote about the fragility of borrowing and spending as an economic strategy and suggested it might be time for our policymakers to find a better one, by taking a look at what worked during the golden age, 1950-1973, the greatest period of growth the world has ever seen.
Back then, our grandparent’s generation managed to double their income in less than twenty years. Their governments shrunk the massive deficits that won second world war without even breaking a sweat. The financial sector was much smaller and much less well paid, taxes were higher, unions stronger. According to the Reagan/Thatcher orthodoxy that mutated into the Clinton/Blair orthodoxy, these policies were a prescription for stagnation. But the golden age created a far richer economy than the neoliberal era that replaced it.
Globalisation, deindustrialisation, deunionisation and the liberation of capital from national boundaries have changed our world irrevocably, but we could still take some lessons from the past. The first and most obvious piece of advice would be to shrink the financial sector. During the last years of the bubble, 40 per cent of US corporate profits were made in banking and finance. That is an unnaturally large share of national wealth going to a handful of people who produce nothing, and whose function is merely to allocate scarce societal savings towards productive investments. Unfortunately, much financial activity doesn’t even do that. Instead of serving the real economy of goods and services, finance has become a parasite on it.
The cure? Unproductive, self-referential transactions should be discouraged. A Tobin tax, the Volker rule, the prohibition of naked credit default swaps would all be a good beginning. Our…